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Rating Action:

Moody's upgrades EUR 105.9m CLO notes of Adagio III

20 Oct 2011

Moody's also confirms ratings of 188.3m of related notes

Frankfurt am Main, October 20, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by ADAGIO III CLO P.L.C.:

....EUR25.8M Class B Senior Floating Rate Notes due 2022, Upgraded to A2 (sf); previously on Jun 22, 2011 A3 (sf) Placed Under Review for Possible Upgrade

....EUR31.5M Class C Senior Subordinated Deferrable Floating Rate Notes due 2022, Upgraded to Baa2 (sf); previously on Jun 22, 2011 Baa3 (sf) Placed Under Review for Possible Upgrade

....EUR28.5M Class D Senior Subordinated Deferrable Floating Rate Notes due 2022, Upgraded to Ba2 (sf); previously on Jun 22, 2011 B1 (sf) Placed Under Review for Possible Upgrade

....EUR17.5M Class E Senior Subordinated Deferrable Floating Rate Notes due 2022, Upgraded to B1 (sf); previously on Jun 22, 2011 Caa3 (sf) Placed Under Review for Possible Upgrade

....EUR6M (current rated outstanding balance EUR4.4M) Class W Combination Notes due 2022, Upgraded to Baa2 (sf); previously on Jun 22, 2011 Baa3 (sf) Placed Under Review for Possible Upgrade

Moody's Investors Service also announced today that it has confirmed the ratings of the following notes issued by ADAGIO III CLO P.L.C.:

....EUR38.3M Class A1B Senior Floating Rate Notes due 2022, Confirmed at Aa2 (sf); previously on Jun 22, 2011 Aa2 (sf) Placed Under Review for Possible Upgrade

....EUR150M Class A3 Senior Floating Rate Notes due 2022, Confirmed at Aa1 (sf); previously on Jun 22, 2011 Aa1 (sf) Placed Under Review for Possible Upgrade

Moody's Investors Service also announced today that it has withdrawn the ratings of the following notes issued by ADAGIO III CLO P.L.C.:

....US$5M Class T Combination Notes due 2022 Notes, Withdrawn (sf); previously on Feb 2, 2007 Assigned Aaa (sf)

....EUR10M Class Y Combination Notes due 2022, Withdrawn (sf); previously on Jun 22, 2011 Ba1 (sf) Placed Under Review for Possible Upgrade

....EUR10M Class Z Combination Notes due 2022, Withdrawn (sf); previously on Jun 22, 2011 Ba1 (sf) Placed Under Review for Possible Upgrade

The ratings of Class A1-A and of the Class U Combination notes remain unaffected at Aaa.

The ratings of the Combination Notes address the repayment of the Rated Balance on or before the legal final maturity. For Classes W, the 'Rated Balance' is equal at any time to the principal amount of the Combination Note on the Issue Date increased by the Rated Coupon of 0.25% per annum respectively, accrued on the Rated Balance on the preceding payment date minus the aggregate of all payments made from the Issue Date to such date, either through interest or principal payments.

The withdrawal of the rating of the Class Y and Z Combination Notes follows the exchange for their respective components.

Class U is backed by an OAT Strip issued by the French Treasury.

The rated balance of the Class T Combination Notes, which were backed by EUR 5.0 million US Treasury Strips and EUR 1.4 million Subordinated Notes, has been reduced to zero following the full paydown of the US Treasury Strips. Class T will continue to receive its pro-rata share of any cash flows to the Subordinated Notes. Moody's notes that the Class T Combination Notes should previously have been placed on watch for possible downgrade on 13 July 2011 and subsequently confirmed on 2 August 2011, along with the watchlisting and subsequent confirmation of the rating of the Government of the United States of America. This watchlisting and subsequent confirmation of the Class T Combination Notes is now reflected on www.moodys.com.

RATINGS RATIONALE

ADAGIO III CLO P.L.C., issued in August 2006, is a multi-currency Collateralised Loan Obligation ("CLO") backed by a portfolio of mostly high yield European loans. The portfolio is managed by AXA Investment Managers. This transaction will be in reinvestment period until 15 September 2013. It is predominantly composed of senior secured loans.

According to Moody's, the rating actions taken on the notes are primarily a result of applying Moody's revised CLO assumptions described in "Moody's Approach to Rating Collateralized Loan Obligations" published in June 2011.

Today's actions reflect key changes to the modeling assumptions, which incorporate (1) a removal of the temporary 30% default probability macro stress implemented in February 2009, (2) increased BET liability stress factors as well as (3) change to a fixed recovery rate modeling framework. Additional changes to the modeling assumptions include (1) standardizing the modeling of collateral amortization profile, and (2) changing certain credit estimate stresses aimed at addressing the lack of forward looking indicators as well as time lags in receiving information required for credit estimate updates, and (3) adjustments to the equity cash-flows haircuts applicable to combination notes.

Moody's notes that an input was inadvertently omitted from the rating model at the last rating action in December 2009. The cash balance modeled was lower than the actual cash balance at that time. Had the actual cash balance been considered the model would have indicated a lower expected loss for each of the classes of notes. This could have led to higher ratings for certain classes of notes. This input is now included in the ratings of the notes.

The Class A/B, Class C, Class D, and Class E overcollateralization ratios are reported at 124.7%, 115.3%, 108.0% and 104.3%, respectively, versus November 2009 levels of 125.0%, 115.6%, 108.2% and 104.1%, respectively, and all related overcollateralization tests are currently in compliance. In particular, the Class E overcollateralization ratio has benefitted from the diversion of excess interest to deleverage the Class E notes in the event of a Class E overcollateralization test failure, including on the March 2010 payment date, when EUR 1.7million of interest proceeds reduced the outstanding balance of the Class E Notes by 9.5%. None of the classes of notes is currently deferring any interest.

Reported WARF has increased from 2,571 to 2,888 between August 2011 and November 2009.

However, the actual stability in credit quality is not reflected appropriately in this reported WARF because of the technical transition related to rating factors of European corporate credit estimates, as announced in the press release published by Moody's on 1 September 2010. Additionally, defaulted securities are now 0 million of the underlying portfolio compared to EUR 13.6million in November 2009.

Due to the impact of revised and updated key assumptions referenced in "Moody's Approach to Rating Collateralized Loan Obligations" published in June 2011, key model inputs used by Moody's in its analysis, such as the portfolio par amount, WARF, diversity score, and weighted average recovery rate, may be different from the trustee's reported numbers. In its base case, Moody's analyzed the underlying collateral pool to have a performing par and principal proceeds balance of EUR 496.6million, a weighted average default probability of 23.45% (consistent with a WARF of 2,932), a weighted average recovery rate upon default of 44.67% for a Aaa liability target rating, a diversity score of 30 and a weighted average spread of 2.95%. The default probability is derived from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The average recovery rate to be realized on future defaults is based primarily on the seniority of the assets in the collateral pool. For a Aaa liability target rating, Moody's assumed that 86.68% of the portfolio exposed to senior secured corporate assets would recover 50% upon default, while the remainder non first-lien loan corporate assets would recover 10%. In each case, historical and market performance trends and collateral manager latitude for trading the collateral are also relevant factors. These default and recovery properties of the collateral pool are incorporated in cash flow model analysis where they are subject to stresses as a function of the target rating of each CLO liability being reviewed.

Moody's notes that this transaction is subject to a high level of macroeconomic uncertainty, as evidenced by 1) uncertainties of credit conditions in the general economy and 2) the large concentration of speculative-grade debt maturing between 2012 and 2015 which may create challenges for issuers to refinance. CLO notes' performance may also be impacted by 1) the manager's investment strategy and behavior and 2) divergence in legal interpretation of CDO documentation by different transactional parties due to embedded ambiguities.

Sources of additional performance uncertainties are described below:

1) Moody's also notes that around 62% of the collateral pool consists of debt obligations whose credit quality has been assessed through Moody's credit estimates. Risks and stresses associated with the usage of credit are described in a report titled "Updated Approach to the Usage of Credit Estimates in Rated Transactions" published in October 2009."

2) Other collateral quality metrics: The deal is allowed to reinvest subject to passing a model based reinvestment test and the manager has the ability to deteriorate the collateral quality metrics due to the existing cushions of this model based reinvestment test versus the covenant levels. As part of the base case, Moody's considered the weighted average spread consistent with the midway spread levels due to the large difference between the reported and covenant levels and a diversity score worse than the actual diversity score.

3) Weighted average life: The notes' ratings are sensitive to the weighted average life assumption of the portfolio, which may be extended due to the manager's decision to reinvest into new issue loans or other loans with longer maturities and/or participate in amend-to-extend offerings. Moody's tested for a possible extension of the actual weighted average life in its analysis.

4) The deal has significant exposure to non-EUR denominated assets which are hedged by an FX macro swap. Volatilities in foreign exchange rate will have a direct impact on interest and principal proceeds available to the transaction, which may affect the expected loss of rated tranches. This FX macro swap counterparty is AIG, rated Baa1/ P-2 by Moody's. AIG is fully collateralizing the current exposure, as prescribed by the transaction documentation.

The principal methodology used in this rating was "Moody's Approach to Rating Collateralized Loan Obligations" published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's modeled the transaction using the Binomial Expansion Technique, as described in Section 2.3.2.1 of the "Moody's Approach to Rating Collateralized Loan Obligations" rating methodology published in June 2011.

The cash flow model used for this transaction, whose description can be found in the methodology listed above, is Moody's EMEA Cash-Flow model.

In addition to the quantitative factors that are explicitly modeled, qualitative factors are part of the rating committee considerations. These qualitative factors include the structural protections in each transaction, the recent deal performance in the current market environment, the legal environment, specific documentation features, the collateral manager's track record, and the potential for selection bias in the portfolio. All information available to rating committees, including macroeconomic forecasts, input from other Moody's analytical groups, market factors, and judgments regarding the nature and severity of credit stress on the transactions, may influence the final rating decision.

REGULATORY DISCLOSURES

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Matthias Wahl
Analyst
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Florence Tadjeddine
Senior Vice President
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades EUR 105.9m CLO notes of Adagio III
No Related Data.
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